Acquisition bias undermines megatrends for this company
The wave of industrial automation in the United States is rapidly gaining momentum, fueled by significant investments in enhancing supply chain operations.
However, this transformation often goes underappreciated by credit rating agencies.
These agencies, primarily focused on the financial strategies and risk profiles of companies, may overlook the potential benefits that these ongoing industrial trends can bestow upon businesses.
They tend to emphasize the current strategies without fully acknowledging how these technological advancements could positively impact a company’s future performance.
Columbus McKinnon (CMCO) emerges as a noteworthy example in this context. Specializing in motion control and material handling technology, the company also strategically engages in acquisitions to fuel its growth.
Today, we’re exploring Columbus McKinnon’s credit risk profile with Uniform Accounting, to understand if rating agencies have been precise in their evaluation of the company.
We can use Uniform Accounting to put the company’s real profitability up against its obligations and decide for ourselves the true risk of this business.
Also below, a detailed Uniform Accounting tearsheet of the company.
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The U.S. industrial sector is currently experiencing a notable shift, characterized by key megatrends such as the rise of industrial automation, increased investments in robust supply chain systems, and a growing preference for onshoring.
These trends mark a significant move towards embracing advanced technologies and refining manufacturing processes.
Industrial automation, in particular, stands out as a pivotal element in this transformation, driving efficiency and productivity through innovative technological applications.
Columbus McKinnon (CMCO), at the forefront of this industrial revolution, is perfectly positioned to benefit from these changes.
The company specializes in designing, manufacturing, and marketing an array of smart mobility products, including cranes, crane components, precision conveyors, light rails, and advanced digital control systems. This diverse product range is increasingly crucial in a market gravitating towards automated and efficient solutions.
However, the company’s growth strategy, heavily reliant on acquisitions, has raised concerns among credit rating agencies.
These agencies often overlook the firm’s adeptness in navigating this growth path.
Since 2020, Columbus McKinnon has seen a significant improvement in its Uniform return on assets (ROA), impressively doubling from approximately 8% to an impressive 16% in the last year.
The Uniform ROA performance indicates the success of its acquisition strategy. The firm is strategically moving into higher-margin areas like specialty conveying and automation, signaling potential for enhanced growth.
Columbus McKinnon’s approach to acquisitions is discerning and strategic.
A notable instance is its acquisition of Dorner Manufacturing Corporation, a leader in precision conveyance solutions, which positions the firm strongly in the automation and specialty conveying sectors. This move exemplifies Columbus McKinnon’s commitment to bolstering its portfolio in high-value areas.
Despite these strengths, credit rating agencies tend to miss the distinct qualities and resilience of companies like Columbus McKinnon, generally applying a cautious stance across the board, especially towards firms focusing on growth through acquisitions.
Therefore, S&P gives the company a “B+” rating, indicating a significant risk of default at nearly 25% over the next five years. It also puts the company in the risky high-yield basket.
Here at Valens, we believe that the company deserves a more secure credit rating, due to its strategic acquisitions and clean balance sheet.
We can figure out if there is a real risk for this company by leveraging the Credit Cash Flow Prime (“CCFP”) to understand how the company’s obligations match against its cash and cash flows.
In the chart below, the stacked bars represent the firm’s obligations each year for the next five years. These obligations are then compared to the firm’s cash flow (blue line) as well as the cash on hand available at the beginning of each period (blue dots) and available cash and undrawn revolver (blue triangles).
The CCFP chart shows that Columbus McKinnon’s cash flows are more than enough to serve all its obligations going forward.
The chart suggests that the company has a strong financial footing and should be able to meet its obligations without difficulty over the next five years.
Columbus McKinnon has insignificant debt obligations maturing in 2026, which creates no risk at all considering the company’s robust cash flow.
Furthermore, the company’s strategic acquisitions have the potential to enhance cash generation in future periods, especially with ongoing trends.
Our analysis of Columbus McKinnon demonstrates that the company’s risk of default is quite low, as opposed to what rating agencies suggest.
Thus, we are assigning an “IG3-” rating to the company. This rating places the company in the investment-grade basket, indicating a risk of default of only about 1%.
It is our goal to bring forward the real creditworthiness of companies, built on the back of better Uniform Accounting.
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SUMMARY and Columbus McKinnon (CMCO:USA) Tearsheet
As the Uniform Accounting tearsheet for Columbus McKinnon (CMCO:USA) highlights, the Uniform P/E trades at 12.8x, which is below the global corporate average of 18.4x and its historical P/E of 14.8x.
Low P/Es require low EPS growth to sustain them. In the case of Columbus McKinnon, the company has recently shown an immaterial Uniform EPS shrinkage.
Wall Street analysts provide stock and valuation recommendations, that in general, provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.
We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Columbus McKinnon’s Wall Street analyst-driven forecast is for a 16% and 17% EPS growth in 2024 and 2025, respectively.
Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Columbus McKinnon’s $36 stock price. These are often referred to as market-embedded expectations.
Furthermore, the company’s earning power in 2023 was 3x the long-run corporate average. Moreover, cash flows and cash on hand are 3x its total obligations—including debt maturities and capex maintenance. The company also has an intrinsic credit risk that is 360bps above the risk-free rate.
Overall, this signals a moderate credit risk and a low dividend risk.
Lastly, Columbus McKinnon’s Uniform earnings growth is above its peer averages and is trading below its average peer valuations.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research